Wednesday, June 02, 2010

Government's role in ratings agencies' failures overlooked

John Carney on, "The Missing Culprit at the Credit Ratings Hearings":

"While there can be little doubt that the ratings process was not what it should have been, it is hard to understand why the ratings of a venerable company like
Moody’s went so awry without focusing on the role of government regulation. Even more importantly, it’s impossible to understand why the poor performance of ratings agencies led to a financial crisis of such scale and extremity without delving into the role of government.

For decades, the has government all but guaranteed that the ratings process was reserved for a narrow oligopoly of just a few companies—primarily Moody’s and Standard & Poor’s, with Fitch a distant third. The main mechanism for this guarantee is a rule put in place by the SEC in 1975 that declared that brokerages and money market funds have to hold securities rated by a small clique of companies the SEC annointed as Nationally Recognized Statistical Rating Organizations.

Without serious competition, the ratings agencies had little incentive to improve their own performance. Even today, nearly every credit agreement created by a major U.S. financial institution requires a rating from Moody’s or S&P..."

Yep.

Tom Woods makes the very same point about the ratings agencies in his book, Meltdown. How can anyone have expected these firms to hand out timely and accurate assessments of credit risk in (once politically favored) mortgage-backed securities when their own politically protected existence, and profits, hung in the balance?